The US Central bank (The Federal Reserve) announced their plans to defer launching a retail CBDC (central bank digital currency) as the FedNow service will solve the same issues.
However, FedNow and retail CBDCs are quite different, so that announcement was misleading.
First, let’s cover what FedNow is, and the problem that it solves.
Moving money between banks us a slow process.
A common solution now is to use ACH payments which requires 2-4 days for the transaction to settle (for the money to get from person A’s bank account to person B’s bank account)
The US central bank announced plans to launch the FedNow service in 2023, and it may replace ACH (if it gains adoption).
FedNow will speed up the transactions between banks within the US, which may have a tremendous impact on the flow of money within the economy.
Transactions would be settled in real time, which means the money would be transferred instantly (similar to a PayPal transaction).
Companies could pay employees very quickly, bill payments would be instant, and other scenarios where funds are send from A to B would go through immediately.
Ripple partner Volante was selected as a participant in the FedNow pilot program, which may mean both RippleNet and Volante will be a part of FedNow once it goes live in 2023.
The interesting consequence is commercial banks lose one of their revenue streams. The reason it takes several days to move money is the banks profit from “the float”. They lend the money out during that gap, and earn money from interest fees.
With FedNow, the instant payments mean there won’t be a float to profit from anymore.
It’s misleading to say that FedNow is a replacement for a US Digital Dollar CBDC.
Central bank digital currencies could be used in FedNow, but so could any stablecoin or digital currency approved by the central bank.
CBDCs are digital currencies that use smart contracts, and are issued directly by the central bank. They can be used to deliver value directly to citizens quickly, however, they can also be programmed to only allow specific types of purchases.
It’s good news for Americans that the US CBDC has been delayed, and also that FedNow will be coming online in 2023.
However, don’t assume that implementation of FedNow means the central bank won’t look to implement a CBDC in the future.
Based on what the European Central Bank has shared publicly, we will likely see a CBDC in Europe before the US.